Providence Health Plans' new insurance program for public employees in Portland is a sign of things to come.

Under the plan, patient care is centered around Providence facilities and services -- its hospitals, its own outpatient surgical services and its own physician group. This plan reveals Providence Health Systems' hunger to become a more close-knit system.

"We are moving to grow out the medical group and health plan, and to become more integrated," said Rick Cagen, chief strategic and administrative officer for Providence Health System.

Providence has historically contracted with providers outside its system, but is increasingly favoring its own providers and services. It can steer patients to its own facilities and providers through its insurance network and by charging patients more money for out-of-network visits.

There is a clear business case for the health system to tighten its network. But this strategy might also result in patients' having fewer choices and in reduced income for doctors outside the Providence system.

Providence sparked a groundswell of anger among local physicians last year when it eliminated Body Imaging Radiology and Epic Imaging-East from its preferred provider network. In response, the imaging centers filed an antitrust lawsuit against Providence Health System that was dismissed last month.

Cagen said Providence will always contract with some providers outside its system -- despite its trend toward a more integrated model -- but this is little comfort to providers who fear they will be cut from the Providence network next.

"It's a fact of life that this strategy is unsettling to many physicians in the community. But the issue of whether it is legal or not has been resolved. The Sisters of Providence are within their legal rights to make these decisions," said Jim Kronenberg, chief operating officer for the Oregon Medical Association, a physician advocacy group with 7,000 members.

Providence's insurance plan has more contracting clout than is evident at first blush. In addition to Providence Health Plan's 165,000 commercial members, the health plan "rents" its primary care and specialist physician network to about 100 insurance companies serving employers in Portland. Thus, when a doctor is cut from Providence's preferred provider network, the economic effect is pronounced.

Dr. Gerald Warnock, medical director of Epic Imaging, said that his center's business dropped 20 percent in the wake of termination from the Providence's preferred-provider panel on July 1, 2005. Patients can still get the imaging procedures at the center, but for a higher out-of-network rate.

Providence already has all the pieces to become a more self-contained provider in the Portland market. It owns and operates three hospitals, and a fast-growing physician group and health plan. (The Providence Medical Group grew 84 percent between 2004 and 2006, to employ 153 physicians.) The health system is also joint owner of several ancillary services, which reduces its need to rely on outsiders. It owns a stake in four medical imaging centers in Portland, and in the Oregon Outpatient Surgery Center in Tualatin.

Primary care physicians fear they may be next for elimination from the Providence network, considering the growth of the employed physician group.

"[Primary care] physicians will probably be the ones who will lose their contracts with Providence initially, before specialists. In the metro area this could mean the loss of 10 to 15 percent of their business. For family practice doctors, that will have a major effect on the practice," said Marilyn Happold-Latham, administrator of Womens Clinic PC.

But there's a textbook business case to be made for closer health system integration. The U.S. health care system is frequently criticized for being fragmented and disorganized, with little communication between its elements. That means providers often make care decisions based on incomplete information, and poor communication leads to expensive duplication of medical tests and medical errors.

Providence Health System leaders say the integration effort gets to the roots of that problem. Providence is also likely to gain a competitive advantage over less integrated systems. Patients and their medical charts more easily flow between components of an integrated health system. Combined with electronic medical records system, the model can weed out duplicate tests and provide better care for chronic disease patients.

"Particularly for patients with chronic diseases, it is important to know when you go for an office visit that all your test results will be there, in one place. The Providence IT system even reminds physicians which tests patient need, and when," said Ingrid Norberg, spokeswoman for the Public Employees' Benefit Board.

But some patients might find their choices are limited by this model. Internist Dr. Daniel Urbach was one of the physicians who protested Providence's decision to drop Epic from their employer network.

"If Providence decides that you can only go to their facilities, and their facilities have poor customer service and don't give results promptly, you won't have any choice," Urbach said. "It was a common issue that Providence was unable to do something right away, when Epic was."